New High Isn't Always Something To Celebrate

Perhaps the toughest lesson the stock market teaches is not to trust a top-of-the-world feeling.

Experienced investors  meaning those who have suffered from their own mistakes  know that their own euphoria is a danger sign.

For example, when a stock makes a new high in low volume, that's a sell signal. It indicates that fewer institutional investors are willing to pay higher prices for the stock. In other words, demand slackens.

But often, the excitement of a new high will tempt an investor to ignore the low volume. It's only human to refuse to let anything spoil a party feeling.

Other times, investors may not realize the danger in that type of action.

Let's look at the rally that began in August 2007. It was the last decent rally before the market tanked, and it had some outsize winners.

Pay special attention to weekly volume. One day of disappointing volume on the daily chart is not necessarily meaningful.

Robotics surgery company Intuitive Surgical ( ISRG) was surging in the second half of 2007.

In mid-October, it galloped ahead as it reported third-quarter earnings growth of 111%, with sales jumping 64% 1.

The stock staked out new highs in fast trade 2  a bullish move.

In mid-November, however, analysts lowered their estimates for the current quarter, the current year and the next year 3. This should have put an investor on alert. A lowered estimate isn't necessarily deadly, but it can have impact.

Intuitive Surgical corrected, but it found support at its 50-day moving average.

When the stock bounced up and moved toward new highs, though, volume was below average 4. That was a warning.

In mid-December, analysts again lowered estimates 5. The stock corrected.

Eventually, Intuitive Surgical made another run at new highs, but again the volume was weak 6.

The stock began a steady decline from there.

Keep in mind, though, that new highs in low volume aren't the only topping signal.

So don't hold a stock simply because it hasn't made a new high in low volume.

There are other warning signs to look for, such as a climax top, in which a stock's long advance grows rapidly in one to three weeks, or a failed breakout from a late-stage base.